Posted Date: March 5, 2019

Author:  Office of Postsecondary Education (OPE)

Subject: Determining the prorated amount of charges associated with a payment period

The Department of Education (Department) has received several requests for clarification of the provisions found in 34 CFR 668.164(c) related to crediting a student’s ledger account with Title IV funds to pay for allowable charges associated with a payment period, particularly where an institution debits that account at the beginning of the student’s enrollment for the entire cost of books, supplies, and equipment (including the cost for kits) to be used throughout the program. Additionally, we have been asked to provide specific guidance on determining whether a charge for books and supplies is an institutional or non-institutional charge. This announcement explains the relevant provisions, places those provisions in context relative to the ways in which institutions charge for books, supplies, and equipment, and responds to questions we have received regarding this matter.

Background

With the implementation of the cash management final regulations on July 1, 2016, the Department clarified its policy with respect to the proration of charges for books and supplies when a student does not have a real and reasonable opportunity to obtain those books and supplies, and equipment from a source other than the institution. Previously, institutions were permitted to include the full cost of books and supplies as charges for the first payment of a student’s attendance when determining the amount of a Title IV aid to credit to the student’s account and the amount of any Title IV credit balance to be refunded. However, on or after July 1, 2016, if an institution charges a student for some or all of the student’s books and supplies at the beginning of the student’s enrollment and the student does not have a real and reasonable opportunity to obtain those materials elsewhere, the institution is required to prorate the cost of those materials under the requirements in 34 CFR 668.164(c)(5) when determining the amount of Title IV aid to provide to the student as a credit balance during each payment period.

Institutional Charges vs. Non-Institutional Charges

The Department’s longstanding guidance has been that a charge for books and supplies must be considered an institutional charge if a student does not have a real and reasonable opportunity to purchase the required course materials from any other source but the school. A student has a “real and reasonable” opportunity to obtain required course materials from another source if:

  1. The required course materials are available for purchase at a relatively convenient location unaffiliated in any way with the institution; and
  2. The institution does not restrict the availability of financial aid funds, so the student can exercise the option to purchase the required course materials from alternative sources in a timely manner.

If students do not have a real and reasonable opportunity to obtain the required books, supplies, and equipment from another source, the institution must ensure that it meets the requirements found in 34 CFR 668.164(c)(2) for including those items in tuition and fees, e.g., having an arrangement with a book publisher or other entity that enables it to make those books or supplies available to students below competitive market rates.

Prorating Institutional Charges

If an institution routinely debits students’ ledger accounts for the amount of the charge for books, supplies, and equipment along with tuition and fees, it is an institutional charge. We consider all institutional charges to be part of a student’s tuition and fees for the purposes of implementing the regulations found in 34 CFR 668.164(c)(1)(i) relating to the crediting of a student’s account. The regulations provide a specific formula for prorating charges if an institution assesses charges for more than a payment period at a time. For programs with substantially equal payment periods where the institution charges up-front for the whole program, total institutional charges, including any books, supplies or equipment charges, must be divided by the number of payment periods in the program. For other programs, the institution must divide the number of credit or clock hours in the payment period by the number of hours in the program and multiply the result by the total institutional charges for the program.

Regardless of whether the institution charges for other types of tuition and fees by the payment period, the cost of books, supplies, and equipment (including kits) must be prorated when determining the amount of Title IV aid to credit for a given payment period if students do not have a real and reasonable opportunity to purchase the books, supplies, and equipment elsewhere and those items are intended for use over a greater timeframe than a payment period. In cases where an institution charges tuition and fees by payment period, but is required to prorate the cost of books, supplies, and equipment over more than one payment period, the institution should add the cost of the books and supplies prorated under the regulatory formula to the tuition and fees it charges for the payment period when determining the amount of Title IV aid to credit to the student’s account for that payment period and the amount to provide to the student as a credit balance.

Return of Title IV Funds Considerations

Unless an institution receives funds under the reimbursement or heightened cash management monitoring payment methods, a student or parent may provide an optional authorization for the institution to hold his or her Title IV credit balance refund under 34 CFR 668.165(b)(1)(ii). Under that authorization, the institution may retain Title IV funds in excess of the prorated amount. If this occurs and the student subsequently withdraws from a non-term program measured in either clock or credit hours, under 34 CFR 668.22(g)(3) the institution must use as “institutional charges” in Step 5 of the Return of Title IV Funds calculation, the greater of:

  1. The prorated amount of the student’s institutional charges as determined under 34 CFR 668.164(c)(5); or
  2. The amount of Title IV funds that the institution retained as of the student’s withdrawal date, which may exceed the prorated amount as a result of the student or parent’s authorization for the institution to retain those funds.

Additionally, when a student withdraws, the Department’s longstanding guidance limits the amount of the Title IV aid that an institution must return to the Department for aid credited for certain types of unreturnable equipment, even if charges for such equipment would otherwise be considered an institutional charge under 34 CFR 668.164(c)(1)(i). When performing a Return of Title IV Funds calculation, an institution may exclude from institutional charges the total documented cost of unreturnable equipment and the documented cost of returnable equipment if not returned in good condition within 20 days of withdrawal. Note that the amount that may be excluded is the amount that the institution actually paid for the materials, not necessarily what it charged students to purchase them.

Questions and Answers

Q1 If a student has a real and reasonable opportunity to purchase required kit tools and books from another vendor, but chooses to purchase those same supplies from the school, can those supplies be charged as soon as the student receives them and not be prorated over the length of the program?
   
A1 Yes. Provided the student was able to obtain his or her financial aid funds to purchase the required supplies in a timely manner from another vendor, the determining factor in whether the proration requirement applies is whether the charge for books, supplies, and equipment is an institutional charge. The Department’s longstanding guidance is that a charge for books and supplies must be considered an institutional charge if a student does not have a real and reasonable opportunity to purchase timely the required course materials from any place other than the school. A student has a “real and reasonable” opportunity to obtain the required course materials from another source if those materials are available for purchase at a relatively convenient location that is not affiliated in any way with the school and the school does not restrict the availability of financial aid funds so the student can exercise the option to purchase the materials in a timely manner from another source. Otherwise, if the student does not have a real and reasonable opportunity, the school must prorate those charges and ensure that it meets the requirements under 34 CFR 668.164(c)(2) for including the costs of those items as part of tuition and fees.
   
Q2 Under the real and reasonable opportunity provisions, how many alternative purchase options need to be available/provided to students?
   
A2 At least one alternative must be provided with information from the institution that financial aid funds are available timely for a student to purchase those supplies from that source.
   
Q3 Some schools are owned by companies that also produce products used in the schools, for example, a corporate entity in the cosmetology industry has ownership in some of its branded schools. They sell their products to distributors and cosmetology supply companies, not just to students in their own school programs. Can a distributorship or cosmetology supply company be an alternative source for students to purchase their kits and supplies? What degree of separation must be evident for the purchase option to be considered unaffiliated with the school?
   
A3 Yes. Provided its products are widely available on the retail market, a distributor or cosmetology supply company that is owned by or connected with the institution can be an alternative source for students to purchase their kits and supplies. In general, the Department would not consider nationally distributed merchandise routinely available to students and the public for the same price as coming from an affiliated entity.
   
Q4 Are online purchase options appropriate alternatives?
   
A4 Under guidance issued in January 1999, online purchases were not expressly permitted because of the lack of widespread availability of internet access at the time. However, given the availability of course materials that can be purchased online, the ease with which students can make such purchases, and the extent to which those options may be more accessible and/or affordable, we now allow online providers to be alternate sourcesunder the real and reasonable provisions.
   
Q5 If alternate sources are presented to students and the majority still choose to buy from the school, does this create a problem with the school charging for the kit when the student receives it? If so, what percentage would be the point at which the school could no longer apply the charges when the student receives the kit?
   
A5 No, it is not a violation of the alternate sources requirement if the majority of students elect to buy directly from the school, unlessthe students are coerced to do so or the process established by the school does not provide a real and reasonable opportunity for students to timely purchase kits elsewhere.
   
Q6 Is there any concern if specific, branded items are required as part of the kit? This would stem from needing appropriate quality and uniformity for instruction in a group setting.
   
A6 Generally, the school determines the quality of the supplies needed for the coursework and branded items that meet those quality standards. However, a school would not meet the alternate sources requirement if the availability of branded products is so limited that it forces students to buy them directly from the school or that generic or if less costly products of equal quality are not presented as options for students.
   
Q7 What alternative purchase options would be considered an affiliated entity?
   
A7 An affiliated entity would be a related party that provides books, supplies and/or equipment only to students at the institution that are either customized by the seller for the institution, or are not generally available in the retail market or through commercial suppliers. If the books, supplies, and equipment purchased through a supplier that shares corporate ownership with the school are from a widely available product line, this would meet the requirement that the student has a real and reasonable opportunity to purchase the supplies elsewhere.
   
Q8 Guidance states that the cost of non-returnable equipment, or returnable equipment not returned, can be excluded from institutional charges in step 5 of the R2T4 calculation. Who determines if items are returnable, and how?
   
A8 The school determines the items that are returnable and documents the reasons or rationale for making that determination. The school must be able to provide that documentation to the Department upon request.
   
Q9 Does giving students the opportunity to opt out of the manner in which an institution provides books, supplies, and equipment constitute a real and reasonable opportunity to purchase these items from another source?
   
A9 No. Opt-out provisions do not change the nature of charges for books, supplies and equipment from institutional to non-institutional. The regulations under 34 CFR 668.164(c)(2) already require an institution that includes the cost of books and supplies as part of tuition and fees to have a policy under which students may opt out of the way it provides for them to obtain books and supplies (unless it can be documented that the items in question are not available or accessible by students from some other source other than that offered by the school, or the institution demonstrates there is a compelling health or safety reason). The opt-out provision notwithstanding, up-front charges for books, supplies, and equipment are still considered institutional charges.
   
Q10 Does including the cost of books, supplies, and equipment (including kits) in an enrollment agreement automatically result in those charges being considered an institutional charge?
   
A10 Previously, the Department has viewed amounts for books, supplies, and/or equipment that an institution chooses to include in an enrollment agreement as necessarily being institutional charges, regardless of how the charges were debited to students’ accounts. However, we are aware that some states require proprietary and/or vocational institutions to include such charges on all enrollment agreements, and have been asked what, if any, options are available to institutions in these states. Because such state requirements are beyond the institution’s control, the amounts for books, supplies and equipment included on an enrollment agreement will not be considered an institutional charge if the following requirements are met:
  1. There is no up-front charge for books, supplies or equipment on the student’s account ledger, and the student does not in any way incur a financial obligation to the institution (with respect those charges) by signing an enrollment agreement. Essentially, the student must only be signing to acknowledge that a specific kit or other type of equipment is required for the program;
  2. A real and reasonable opportunity, as explained above, exists for students to purchase the kit from a source other than the school; and
  3. In the case where a student opts to buy the kit from the school, a student authorization is obtained in accordance with 34 CFR 668.165(b), allowing the institution to use Title IV funds to pay for charges other than tuition and fees and institutionally provided room and board. Once this is obtained you may charge the student’s account for the kit and use Title IV funds to cover those charges.

Contact Information

For questions about the content of this announcement, please contact Anthony Gargano by email at anthony.gargano@ed.gov.

   

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